Why Japan Favours an FTA With China, Not the US

♠ Posted by Emmanuel
at 6/03/2012 10:06:00 AM

I almost missed this, but better later than never: the Economist's Banyan has a perceptive entry into why a pan-Asian FTA incorporating the world's three largest economies US, China and Japan is unlikely. Not only do the US and China have competing regional interests, but their preferences differ as well. As I've written in the past, the US favours a "high-quality" FTA incorporating its pet issues of intellectual property, competition law, government procurement, the environment and labour. In other words, the US is trying to make its trade partners microcosms of itself, although trade theorists alike Jagdish Bhagwati have been especially wary of many of these as unnecessary add-ons that do not promote trade but merely assuage certain domestic US lobbies.

By contrast, China-led FTAs reflect China's preferences in dealing more with goods than services as well as not cross-linking various economic issues USTR-style. By not placing so many demands on FTA partners, there is in theory a better chance of inking deals. That said, FTAs are not merely about economics but about politics. In our region, some perceive that the US currently has an advantage since many see trade as a way to hedge security bets against an increasingly dominant and potentially belligerent China.

Or so the story went. Recently, Japan has warmed up to China--it's recent vanquisher for second-largest economy status in the global league tables--instead of its nominal geopolitical ally the United States. Despite a fairly heavy full-court press by the US to include Japan in the Trans-Pacific Partnership (TPP) expansion talks, it hasn't really participated there. Instead, Japan has (again) been talking to the +3 in the ASEAN+3 of itself, China and South Korea. These three combined would dwarf the EU, but heaven knows we've been here before:

[A] first reaction to the announcement on May 13th that China, Japan and
South Korea are to open talks on establishing a trilateral free-trade
area is to shrug. The idea has been around for a decade. There are many
obstacles to its realisation. And not so much as a date has been
announced for the talks to begin...

There are a couple of shrug-worthy elements to the proposed free-trade
area. The first is that it will be terribly hard to bring to fruition.
In all three countries, important lobbies will resist the opening to
free competition: Japanese farmers, Chinese state-owned enterprises,
South Korean exporters hoping to steal a march over Japan through a
bilateral free-trade agreement with China. Secondly, any agreement is
likely to be a “shallow” one—allowing plenty of exemptions [especially in agriculture for Japan and South Korea]. South Korea
has signed “deep” agreements with the European Union and America, though
they have been fiercely controversial. But China’s trade agreements,
such as that with the Association of South-East Asian Nations, ASEAN,
tend to be sneered at by American and European trade negotiators as
feeble substitutes for the real thing—FTA-lite.

Once again demonstrating that security and economic concerns do not always coincide, Japan's reluctance to be invovled in the TPP talks signifies realism about what sort of deal it can sign (with many exemptions for agriculture possible) with China, as opposed to what the US wishes (that it be less beholden to certain lobbies alike agriculture). Besides, there's this undying fantasy about American carmakers gaining access to the Japanese market despite decades of unremitting failure. Anyway...

The biggest problem facing the TPP, however, is the failure so far of
Japan to join the process. Without it, says Razeen Sally, an economist
at the Lee Kuan Yew School in Singapore, the TPP “would look
emasculated”. As Japan’s prime minister, Yoshihiko Noda, put it in
March, it would be like The Beatles without Paul McCartney (America is
John Lennon, he said).

To be sure, both the +3 and TPP are going to be difficult endeavours to complete. Still, it's noteworthy that many Asian countries linked by defence pacts to the US alike Japan or for that matter the Philippines, South Korea and Thailand prefer not to participate in the US-led FTA shindig. Is it a sign of waning US influence or FTA fatigue after so much busywork over the past two decades? I believe it's a bit of both.